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Walgreen Shakeup From Investor Pressure Due by August

NEW YORK (TheStreet) -- Walgreen (WAG) will give investors an update on its strategy by late July or early August, as the company completes its acquisition of European pharmacy Alliance Boots and tries to close a performance gap with competitors such as CVS Caremark (CVS - Get Report).

That disclosure will shed light on the future of Walgreen after CEO Gregory Wasson took the company's reins in 2009, and will show whether the Deerfield, Ill.-based company will pursue so-called inversion transaction that would shift its headquarters to a lower tax jurisdiction abroad.

Walgreen's US Fate Could Be Sealed By Labor Day 

Behind the scenes, Walgreen is facing pressure from activist hedge fund investors like Jana Partners to use its two-step acquisition of Alliance Boots to dramatically change the way the company operates amid a tough environment for drugstores and pharmacy benefit manager profit margins. At the most extreme, Jana and other investors would like Walgreen to use the purchase of a remaining 55% stake in Alliance Boots to invert its ownership structure, shifting its headquarters abroad.

Jana, which recently disclosed a near $1 billion stake in Walgreen shares, has also advocated that Walgreen take a significant number of Alliance Boots management into its ranks. Stefano Pessina, CEO of Alliance Boots, is already Walgreen's largest investor and his overall ownership could grow in excess of 16% of the company's outstanding stock when phase two of the transaction closes.

Pessina orchestrated the construction of Alliance UniChem Group and merged it with Boots in 2006. The combined company was quickly bought by private equity firm KKR in a $22 billion deal at the height of the credit bubble. Jana and other investors believe Pessina team could greatly improve performance throughout Walgreen. However, it is Walgreen that is buying Alliance Boots.

Could Alliance Boots ultimately wind up buying Walgreen as part of an inversion transaction and Pessina be working on a bit of a management coup of the U.S. pharmacy giant? That remains to be seen. Walgreen's outlook later this summer will show the extent that investors are influencing the company's decision making. Barclays analyst Meredith Adler recently said Walgreen investors are in the driver's seat.

"Walgreens' management and Board appear to have begun to internalize the constructive criticisms of increasingly vocal shareholders. We believe the Board is actively considering changes that could materially boost earnings and the stock price. Potential initiatives include reducing expenses and optimizing the capital structure, which can be implemented at any time, as well as inverting the existing corporate structure to achieve tax savings, which is a more complicated undertaking," Adler wrote in a June 18 client note.

Not Just about Inversions

Perhaps an inversion will prove too complicated and it is possible that investors are not completely wedded to such financial engineering. Other issues like gross margins, store volumes and share buybacks could prove more important to investors, especially after Walgreens disappointing third quarter earnings.

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In its May-ended quarter, the drugstore chain recorded net income of 91 cents a share, 3 cents short of what analysts surveyed by Thomson Reuters expected. Revenue of $19.4 billion missed expectations of $19.48 billion.

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